There are two routes retailers can take when selling on Amazon: 1P (first-party) or 3P (third-party). There are many differences between the two models, including which platform you will be working in: Vendor Central or Seller Central. (To understand each option better, we broke them down in detail here.) This article will discuss selling 1P via Vendor Central and how it could negatively impact your brand reputation and squeeze margins.
Selling 1P means selling your inventory to Amazon at wholesale, then they act as the retailer, which is why this model is also referred to as Amazon Retail. Once Amazon has purchased the product, there is little for you to do; they now own your products and determine the marketplace pricing, optimize the listings, and essentially do the rest of the platform marketing for you. Your revenue is derived from Amazon’s bulk orders. You benefit from a guaranteed sales channel and reduced inventory carrying costs. When choosing the 1P model, brands interact with Amazon inside Vendor Central to check on the purchase order and payment status, provide updated product information, and review merchandising and advertising insights. Selling via Vendor Central is essentially like having a partnership with Amazon, especially in inventory risk management and sales planning. So, you may be asking yourself, this all seems pretty lovely; how could this decision possibly be hurting my company?
Here are five reasons why selling through Vendor Central may negatively impact your business.
- Loss of Pricing Control: Selling to Amazon means that you are ultimately giving up control of pricing. Amazon’s pricing strategy runs the risk of breaking MAP agreements because Amazon will always sell at the lowest price. Amazon decides product pricing based on matching websites running sales or selecting the lowest price to achieve the most sales possible. This will become a positive for your customers – as they will be getting the best deal, but it will prove to be problematic for your business. Competitors will start competing with Amazon’s low pricing, and over time it will erode your overall pricing strategy. Amazon’s pricing can have a ripple effect on your other retail outlets and your brand’s integrity.
- Hidden Costs: Sure, only having to pay a flat participation fee to Amazon instead of the variable marketplace fees for fulfillment and referrals sounds nice, but the problems lay in the hidden costs. There are a few examples of how Amazon can charge you with unseen impacts on revenue. The first comes when they want to increase your products’ profitability and demand higher selling fees or lower costs. A more common issue comes from the chargeback costs if there is a problem with inventory levels. For example, you send Amazon 1,000 items, but for some reason, their fulfillment center only counts 900 – they will only pay for the 900 products even if you know you sent the1,000, and they miscounted. It will be an endless road trying to prove that they were wrong and getting the issue resolved, not to mention that it is 100 pieces of your product that will never be seen again. Overall, these issues may account for 16-20% of gross sales, and sadly there is little you can do to prevent it.
- Poor Customer Service: To piggyback off the last topic, the lack of Customer Service and support that Vendor Central sellers receive is a real setback. As mentioned, if Amazon makes a mistake counting your bulk product orders (PO’s) – it would be nearly impossible to get the support you need from them to fix the issue. Often, Amazon’s customer service support team is outsourced overseas. Their employees may suffer a language barrier and can miss essential brand elements. Amazon’s concern with customer service for the brands that they buy products from is surprisingly low and will almost definitely create problems over time.
- Products Returned to Amazon Are Resold: This may come as a surprise to sellers, but Amazon’s returns methodology is a bit shocking. Their current process includes discharging returns to large national liquidators. These companies will then flip these products to “at home” or amateur Amazon sellers, who then resell the broken, used, or missing parts products right back on Amazon and falsely claim that they are new. This leads to bad reviews and increased returns.
- Your Amazon Presence Is Out Of Your Control: Lastly, a significant concern for selling Amazon Retail is that your entire brand’s presence on Amazon is entirely up to the company and how they determine when to make PO’s. Often, Amazon uses proprietary algorithms to determine when would be the best time to make a product order. And often, these bots will get things wrong. The predictive models do not always factor in industry-specific market conditions or seasonality and can end up hurting your sales. If you sell a product targeted for the Summer season, Amazon may not recognize that and think to double down on orders as they will go faster; they will usually make a blanket judgment and treat product orders the same or similarly year-round. If you want to sell more products for Summer, you will be out of luck when selling via Vendor Central because it is not up to you anymore; it is all determined by Amazon. Additionally, you have no control over your product images or description as they will all have to be approved by Amazon’s team, which relinquishes another form of control over your presence on the platform.
Upfront, it may seem like selling 1P via Vendor Central is the easiest, most efficient way to be successful on Amazon. They do the hard work for you – or so it seems. But after reading this article, brand owners should recognize how selling via Vendor Central may be hurting their brand. If the alternative, which means selling your products by yourself on Amazon (3P), seems too overwhelming, Amazzia is here to help. We can assist brands struggling with Amazon in both 1P and 3P relationships, and we also specialize in assisting 1P to 3P transitions.